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Sales Suppression: the International Dimension American University Law Review Volume 65 Issue 5 Article 4 2016 Sales Suppression: The International Dimension Richard Thompson Ainsworth Boston University School of Law, [email protected] Follow this and additional works at: https://digitalcommons.wcl.american.edu/aulr Part of the Commercial Law Commons, International Law Commons, and the Tax Law Commons Recommended Citation Ainsworth, Richard Thompson (2016) "Sales Suppression: The International Dimension," American University Law Review: Vol. 65 : Iss. 5 , Article 4. Available at: https://digitalcommons.wcl.american.edu/aulr/vol65/iss5/4 This Article is brought to you for free and open access by the Washington College of Law Journals & Law Reviews at Digital Commons @ American University Washington College of Law. It has been accepted for inclusion in American University Law Review by an authorized editor of Digital Commons @ American University Washington College of Law. For more information, please contact [email protected]. Sales Suppression: The International Dimension This article is available in American University Law Review: https://digitalcommons.wcl.american.edu/aulr/vol65/ iss5/4 SALES SUPPRESSION: THE INTERNATIONAL DIMENSION RICHARD T. AINSWORTH' TABLE OF CONTENTS Introduction ................................... ..... 1241 I. The Canadian Fraud Cases .................... ..... 1247 A. Salesmen .............................. ..... 1247 B. Restaurants..................................1248 C. Manufacturer ........................... ..... 1249 II. The American Fraud Cases .................. ....... 1252 A. U.S. Restaurants.. .............................. 1254 B. U.S. Salesmen ................................ 1259 III. Lessons Learned ................................. 1265 Conclusion .................................... ..... 1270 INTRODUCTION Sales transaction taxes are highly susceptible to technology fraud,' which is an inevitable result of today's widespread reliance on * Richard T. Ainsworth is the Director of the Graduate Tax Program at the Boston University School of Law, and an Adjunct Professor at the Graduate Tax Program, NYU School of Law. 1. See John Crudele, Finally! NY Tax Cops Wise Up, Stait Busting Sales Tax "Zappers", N.Y. POST (June 8, 2015, 9:55 PM), http://nypost.com/2015/06/08/after- years-of-warning-state-finally-notices-sales-tax-zappers (theorizing that transaction tax fraud may have cost the state of New York "billions in lost sales tax"). In 2009, the New York state tax collector conducted a sting operation that targeted companies that manufacture the point of sale (POS) devices containing sales-suppression software (also called zappers) that facilitate the transaction fraud. Id. The state tax collector found that of the twenty-six companies that manufacture such devices, twenty- five of them offered to help those conducting the sting operation evade taxes. Id. 1241 1242 AMERICAN UNIVERSITY LAW REVIEW [Vol. 65:1241 technology to document taxed transactions. Technology can be (and is) manipulated to defeat the collection of these taxes. Both the U.S. retail sales tax (RST) and the European value added tax (VAT) are vulnerable to technology-based fraud. This Article concerns sales suppression-intentionally not recording sales-in the RST, and at the final stage of the VAT, the retail stage, when tax is collected from final consumers. The modern electronic cash register (ECR)/point of sale (POS) system is vulnerable to fraud.' These devices are essentially computers with programming that is molded to meet the commercial needs of any particular business.' Although these devices are functionally similar across all retail establishments, the data engines on which they operate are not.' In the United States, the dominant 2. See Steven Aldrich, Point-of-Sale System Basics for Retailers, ENTREPRENEUR, http://www.entrepreneur.com/article/77960 (explaining that computerized POS systems have "grown in popularity over conventional cash registers" because they not only ring up sales, but also "amass vital, real-time information about" a business's customers and inventory). 3. See, e.g., United States v. Leonard, 37 F.3d 32, 35 (2d Cir. 1994) (involving defendants who utilized a computer program to alter a store's sales data, allowing them to successfully skim over $17.1 million over a ten-year period). "Skimming" is a method for concealing revenue. See Richard Thompson Ainsworth, Automated Sales Suppression (Zappers): A Real Threat to Pennsylvania's Sales and Use Tax, 8 Prrr. TAx REV. 29, 33 (2010) (explaining the "simplest (nontechnological) form" of skimming involves diverting cash from sales into a secret drawer). 4. See Ainsworth, supra note 3, at 38 (discussing how a man named Talal Chahine and his wife, Elfat El Aouar, were able to electronically skim more than $20 million from their Detroit restaurant chain over a four year period). 5. See Chris Poulin, Wat Retailers Need to Learn from the Target Breach to Protect Against Similar Attacks, SECURITY INTELLIGENCE (updated Feb. 20, 2014), https://securityintelligence.com/target-breach-protect-against-similar-attacks- retailers (recounting that hackers stole "the personal and financial information of approximately 110 million people" from Target and that it is likely that the attackers compromised the store's POS systems to gain access to this private data). 6. See WES WHITTEKER, SANS INST., POINT OF SALE (POS) SYSTEMS AND SECURITY 3 (Oct. 2014), https://www.sans.org/reading-room/whitepapers/bestprac/point-sale- pos-systems-security-35357 (explaining that POS technology has existed since the late 1900's with the advent of the first mechanical cash register in 1879). In the late 1980's, POS technology was drastically overhauled with the advent of modern day personal computer technology. Id. An example of a current POS device "would be the check-out counter at a retail or grocery store." Id. 7. See DB-EnginesRanking, DB-ENGINES, http://db-engines.com/en/ranking (last visited May 17, 2016) (ranking some 264 different database management systems or database engines that help run POS technology). 2016] SALES SUPPRESSION 1243 databases are MS SQL Server, MS Access, and MySQL;8 the first two are Microsoft products and the last is an Oracle product." Unsurprisingly, the popularity of Microsoft ("MS") Windows made Microsoft the "go-to" database provider for developers seeking easy installations."' Recently, and most notably in Europe, open source" POS systems based on Linux, a competing operating system, are becoming more common than Microsoft databases." Furthermore, MS databases are not found in the new Apple iOS POS systems or Square Register, which uses an open source PostgreSQL database." This Article will focus on a particular POS system called Profitek, 8. See id. (ranking POS data engines by popularity, with MySQL ranked second, Microsoft SQL Server ranked third, and Microsoft Access ranked seventh out of a total of 264 engines); see also DB-Engines Ranking-Trend Popularity, DB-ENGINES, http://db-engines.com/en/ranking-trend (last visited May 17, 2016) (calculating MySQL, Microsoft SQL Server, and Microsoft Access as some of the most popular database engines over time). 9. MySQL Editions, MYSQL, http://www.mysql.com/products (last visited May 17, 2016); SQL Server 2014 & the Data Platform, MIcROSOFr, https://www.microsoft.com/en- us/server-cloud/prodiicts/sql-server (last visited May 17, 2016); Access, MicRosoFT, https://products.office.com/en-us/access?legRedir-tnie&Correlationld=0da4117d-7af0- 49f0-b001-2918c366e7d1 (last visited May 17, 2016). 10. See Roy Furchgott, With Software, Till Tampering Is Hard to Find, N.Y. TIMES (Aug. 29, 2008), http://www.nytimes.com/2008/08/30/technology/30zapper.html (finding that eighty-five percent of all POS systems run on Microsoft ("MS") Windows systems). 11. Open source refers to computer software with its source code made available (with a license) in which the copyright holder provides the rights to study, change, and distribute the software to anyone and for any purpose. Thus, the Apple systems are closed, and the Linux systems are open, and can be more easily updated or enhanced. What Is Linux?, LINUX.cOM, https://www.linux.com/what-is-linux (last visited May 17, 2016). 12. See Seamus Quinn, Europeans Like it Bigger, Newer and with More Linux, POWERWIRE (Mar. 19. 2015), http://powerwire.eu/europeans-like-it-bigger-newer- and-with-more-linux (indicating that an IBM i (IBM's operating system) marketplace survey revealed that Europe uses Linux more than North America does). The survey's results showed that "56.6% of European Power i users [were] ... running Linux" compared to only 42.7% of users in the United States. Id. 13. See Compare iPad Pos Software, SoFrwARE ADvICE, http://www.softwareadvice.com/retail/ipad-pos-comparison/?more=true#more (last visited May 17, 2016) (comparing 124 software systems that can be run on Apple's POS system, and not listing any MS databases); see also Steve Olenski, Are iPad POS Systems the Future for Retailers?, FORBES (Sept. 26 2013, 1:37 PM), http://www.forbes.com/sites/steveolenski/2013/09/26/are-ipad-pos-systems-the- future-for-retailers/#42e73af42115 (describing how retailers and restaurants are moving towards Apple POS systems using the iPad instead of cash registers); Serious about Security, SQUARE SECURITY, https://squareup.com/security (last visited May 17, 2016) (indicating that Square uses its own POS software). 1244 AMERICAN UNIVERSITY LAW REVIEW [Vol. 65:1241 manufactured in Vancouver by InfoSpec, which uses
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